McCormick Earnings: Sales and Profit Gains Sprout Up Despite Competitive and Macro Challenges

We don’t foresee a material change to our $63 fair value estimate after McCormick MKC cooked up 6% organic sales growth and 150 basis points of adjusted gross margin expansion to 37% in its fiscal third quarter. However, the market soured on shares, sending the stock down at a high-single-digit percentage clip on the print (which we attribute to softness in China and an unchanged operating income outlook, despite the uptick in gross margins). As such, the stock trades just a touch above our intrinsic valuation; we think investors should keep an eye on this wide-moat name, which rarely trades at a discount to our valuation (not seen since 2017).

Even as raging supply chain disruptions have largely been put to rest, competitive pressures persist amid a weakening consumer spending backdrop. Further, inflationary angst has yet to subside, with management calling for a low- to midteens uptick this year. Despite these pressures, we surmise McCormick is judiciously pursuing multiple avenues to ensure its competitive edge holds. For one, while the firm has raised prices to offset a portion of the stepped-up costs it is seeing, McCormick continues to direct resources to bring consumer-valued innovation to market and to tout its fare. In this context, we forecast McCormick will expend around 5% of sales, $400 million annually, on research, development, and marketing to support its brand standing with consumers, retailers, restaurateurs, and packaged food manufacturers. We posit these investments are even more crucial at present, given McCormick is in the midst of the all-important holiday season (September through November, when consumers historically favor branded spices and seasonings in the preparation of holiday meals); this period tends to account for close to 30% of its annual sales. Beyond this, we see the strategic prudence in efforts to extract inefficiencies from its operations while discontinuing the production of some lower-margin offerings.